The impact rising interest rates have on bonds
Duration is a measure used to assess the impact that a change in interest rates will have on a bond. Shorter term bonds are generally less price sensitive than longer term bonds. If a bond fund has a duration of 5 years and interest rates increase by 1%, the bond fund’s unit price may decrease by approximately 5% (5 x 1). Bonds are also affected by other factors such as inflation expectations and the supply and demand for bonds. Different bond funds will react differently to those economic factors, making it important to diversify across asset classes.
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Douglas J. Bodtcher
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